Question

You tell your grandmother about a car you’re thinking of buying and, as expected, she tells you a story about buying her first brand new car for $1,500. You feel envious of older generations and wish you could buy a new car for $1,500. Because you are focusing on________ dollar amounts rather than __________ dollar amounts, you are failing to recognize that the _________ price of your grandmother's car in today’s dollars would _________ $1,500.

Answer 1

Answer:

You feel envious of older generations and wish you could buy a new car for $1,500. Because you are focusing on nominal dollar amounts rather than real dollar amounts, you are failing to recognize that the real price of your grandmother's car in today’s dollars would greater than $1,500.

Inflation makes the value of a currency i.e. the dollar, become less valuable overtime because it is eroding the currency's value. When a currency is adjusted for the effects of inflation, we see the real value of the currency but when it is not, this is the nominal value.

In the text above, the $1,500 is the nominal value in the past. If this value were to be adjusted for inflation in terms of today's dollars, it would show a greater amount than $1,500 because inflation has diminished the value of $1,500 such that it is not worth as much as it was worth in your grandmother's time.